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Thursday, 12 September 2013

China's steams ahead; Reforms enter critical stage

Industrial Output growth at quickest pace in 17 months

China’s
industrial output grew at the fastest pace in 17 months in August and
the broadest measure of new credit almost doubled from July as a
recovery in the world’s second-largest economy gains traction.

Factory production rose 10.4 percent from a year earlier, the National Bureau of Statistics
said in Beijing today, Aggregate financing was 1.57 trillion yuan ($257
billion), the central bank said, topping the median analyst estimate of
950 billion yuan. UBS AG said China’s liquidity and credit squeeze
appears over, while Societe Generale SA said corporate and
local-government debt is rising from already alarming levels.

Premier Li Keqiang said today that August data show a recovery trend,
after the government used measures from tax cuts to extra spending on
railways to defend the year’s 7.5 percent expansion goal. As Communist
Party leaders prepare for a November meeting to discuss policy reforms,
Li said that industrialization and urbanization will fuel growth, the
official Xinhua News Agency reported.

“The government growth
target appears within reach, which reduces the chance of stimulus and
allows the government to focus on reform,” said Ding Shuang, senior
China economist at Citigroup Inc. in Hong Kong.

The benchmark Shanghai Composite Index rose 1.2 percent to the highest close since June. The yuan was little changed at 6.1200 per dollar.

The
gain in output compared with a median forecast of 9.9 percent in a
Bloomberg News survey. The government doesn’t release separate
industrial data for January and February, which are distorted by the
Chinese New Year holiday.

‘Downside Risk’

“If credit
growth picks up persistently from here, China’s current growth recovery
may well last a bit longer and go a bit further,” said Yao Wei, China
economist at Societe Generale in Hong Kong. “However, that only adds to
the downside risk afterwards, as the leverage of Chinese corporates and
local governments keeps rising from the already alarmingly high level.”

Industrial
production topped all 45 analysts’ estimates in a Bloomberg News
survey, with projections ranging from 9.2 percent to 10.2 percent,
following a 9.7 percent gain in July. Thirty-nine of 41 industries
reported growth, including a 13.6 percent gain in ferrous metals and
12.3 percent in chemicals, according to the statistics agency.

Steel
production rose 15.6 percent in August, up from 10.9 percent in July,
and electricity output expanded 13.4 percent, compared with 8.1 percent
the previous month.

Retail Sales

The median estimate
for retail sales was a 13.3 percent advance after 13.2 percent in July.
Fixed-asset investment was projected by economists to rise 20.2 percent
in the January-August period, after a 20.1 percent gain in the first
seven months of the year.

A separate report today showed China’s
passenger-vehicle sales gained the most in four months in August, led by
sales of sport utility vehicles. Wholesale deliveries of cars,
multipurpose and sport utility vehicles climbed 11 percent to 1.35
million units, according to the state-backed China Association of
Automobile Manufacturers today.

China’s exports
rose 7.2 percent from a year earlier, the General Administration of
Customs said Sept. 8. That exceeded the 5.5 percent median estimate of
analysts. At the same time, imports rose a less-than-estimated 7 percent
from a year earlier, leaving a trade surplus of more than $28 billion.

Premier
Li, in an opinion article published yesterday in the Financial Times,
said the economy “will maintain its sustained and healthy growth,” with
expansion around a 7.5 percent “lower limit” intended to ensure steady
growth and employment.

Goldman Sachs Group Inc. last week raised
its estimate for China’s economic growth for the third and fourth
quarters, citing improving global demand and a stronger-than-expected
domestic industrial recovery. JPMorgan Chase & Co. and Deutsche Bank
AG raised their growth forecasts over the past month, bolstering
optimism that Li will meet the government’s target for expansion this
year.

Analyst Forecasts

Analysts surveyed by Bloomberg
News last month gave a median estimate for 7.5 percent expansion this
quarter and 7.3 percent in the October-December period.

China’s
top solar-panel makers are returning to profitability following two
years of losses as higher demand and prices drive up margins. JinkoSolar
Holding Co. last month reported second-quarter net income of $8
million, its first profit since the third quarter of 2011, as sales
jumped 43 percent from a year earlier.

In other economies today,
French industrial production unexpectedly fell in July from the previous
month, while Italy released final figures for second-quarter gross
domestic product that showed a deeper contraction than initially
estimated.

Premier Li Keqiang says Beijing's economic restructuring drive has
entered a critical stage, with an overhaul of the financial sector one
of the most important and most complicated tasks to be tackled.

Indicating concerns that the world's second-largest economy might
decelerate too much as overdone, Li said the central government was
confident it could meet this year's economic goals through structural
reform, ruling out the need to significantly loosen fiscal or monetary
policy to stimulate short-term growth.

Financial reform is an important part of economic system reform. It is a complex, systemic project

In his opening speech to the World Economic Forum in Dalian
yesterday, Li also said the government would seek to identify the core
issues in reforms, which, once implemented, could exert a major impact
on the entire process.

"Financial reform is an important part of economic system reform," he
said. "It is a complex, systemic project, and because it is such a
complex, systemic project, it means China's reforms have entered a
deep-water zone, or the most difficult phase." In the next stage, he
said, the key was to stick to market-oriented principles. The government
would "actively and steadily" push forward with interest rate and
exchange rate liberalisation, promote the yuan's convertibility under
the capital account, and ease barriers for new, smaller players to enter
the state-dominated financial industry, he said.

The steps already taken by Beijing to stem a sharp slowdown in economic growth had had an effect, he said.

"Some people expressed concern about whether China's growth might
decelerate too fast, as some other countries experienced, or even see a
so-called hard landing," he said.

But Li said the economy's fundamentals were "sound" and its operations stable.

The mainland's economic growth cooled to 7.5 per cent in the second
quarter, from 7.7 per cent in the first and 7.9 per cent in the fourth
quarter of last year, hit by global headwinds and excess capacity at
home.

Since then, Beijing has cut tax for small companies, boosted
investment in railways in poorer regions, and raised spending on urban
facilities, while maintaining its grip on credit growth.

Industrial output growth jumped to a 17-month high last month while
export growth quickened, suggesting a solid recovery in economic
dynamics.

Li also said that local governments' borrowings, highlighted by analysts
as an area of concern for financial risks, remained "safe and
controllable".

- Contributed by Victoria Ruan South China Morning Post

Premier Li Keqiang's Profile:

Li Keqiang, born in 1955,
became China's premier in March 2013. Like ex-president Hu Jintao, his
power base lies with the Communist Youth League, where he was a member
of the secretariat of the league’s central committee in the 1980s and
later in the 1990s the secretariat’s first secretary. His regional
governance experience includes a period as vice party boss, governor and
party boss of Henan province between 1998 and 2003 and party boss of
Liaoning province beginning in 2004. He became vice premier in 2008. Li
graduated from Peking University with a degree in economics.